Shanghai-Hong Kong Stock Connect Delivering solutions for Northbound trading

0 Building a Full View of The Business Case

Shanghai-Hong RMB A-Share Market CNH Liquidity Kong Stock Internationalisation evolution Connect

1 Renminbi Internationalization Ellen Tang September 2014 Agenda – RMB Internationalization

Overview of Policy Developments

 Two Track Strategy

 Cross Border Scheme

 Shanghai - HK Stock Connect

Current China Macroeconomic Environment

Liquidity Situation for CNH

 Market Overview

 Liquidity Overview

3 RMB Internationalization Overview of Policy Developments

4 RMB Internationalization A Two-tracked Strategy to the RMB

An innovative approach to RMB liberalization by developing an offshore market that operates in parallel to the onshore market – giving rise to the CNH market

Capital Account Liberalization Interest Rate Liberalization Greater Exchange Rate Flexibility

Onshore RMB – the CNY

Offshore RMB – the CNH

Rising International Presence as a A Deepening Offshore RMB Market Offshore RMB Clearing Trading and Investment Currency

5 Increasing Relaxation for Cross Border RMB Transfer Various cross-border channels available to move RMB in and out of China

The RMB Internationalisation starts with cross-border trade but has now been evolved to liberalise capital account related items on a gradual basis. Current Account Movement Capital Account Movement  Cross-border goods trade  Offshore borrowing  Cross-border service trade  Cross-border 2-way sweep intercompany  Other current account related items e.g. lending (under free trade zone) dividend payments  RMB Foreign Direct Investment (FDI)  RMB Overseas Direct Investment (ODI)

Current Account is fully opened Restrictions on capital account  Simplified RMB cross-border trade are gradually being lifted documentation requirements to support  Subject to specific pilot initiative, quota use of RMB as an invoicing currency or case-by-case approvals to keep the scope controllable

6

Shanghai - HK Stock Connect A Significant Step Towards Market Opening

Shanghai - HK Stock Connect is an ‘open’ conduit A-share total market cap Future expansion of quota is highly likely, in our view QFII 2.3% Expand the foreign share of A-share free float to 8% HK Connect 1.2% . Existing QFII/RQFII quota equates to 2% of total market cap Domestic and 5% of A-share free float institutions 7% . HK Connect northbound quota of RMB 300bn will add 3% to free-float market cap Retail . It also represents the first ‘open’ conduit for 37% investors abroad to participate in A-share market. . Once the mechanism is working smoothly, we expect the quota amount to rise. Controlling shareholders 53%

Note: Retail includes mutual fund management companies, insurance companies and brokers Data as of end-2013, Source: WIND, Standard Chartered Research

7 RMB Internationalization Current Marco Economic Environment

8 Growth Stabilized in Q2

GDP growth, quarterly, y/y %

18%

16% 14.8% 14% GDP growth 12%

10%

8% 7.7% 7.5% 7.4% 6%

4%

2%

0% 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sources: CEIC, Standard Chartered Research

Premier Li Keqiang mandated China to meet ~7.5% GDP growth target in 2014

9 Global Demand for China’s Exports Coming Back

Export growth by destination, y/y, 3mma PMI-new export order, 3mma

70% 60

60% EU ASEAN 50% 55

40% 50 30%

20% 45 10% US 0% 40 -10%

-20% 35

-30%

-40% 30 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sources: CEIC, Standard Chartered Research

10 Trade Surplus is Rebounding Again

Trade surplus is rebounding again, 12mma USD billion 30

25 Trade surplus

20

15

10

5

0 2000 2002 2004 2006 2008 2010 2012 2014

Sources: CEIC, Standard Chartered Research

11 Infrastructure Investments is Rebounding

FAI growth by industry, y/y %, 3mma

60%

50%

40% Manufacturing FAI 30%

20%

10% Real estate FAI Infrastructure FAI

0%

-10%

-20% 2007 2008 2009 2010 2011 2012 2013 2014

Sources: CEIC, Standard Chartered Research

12 Housing Market Did Not Collapse

Sales slowed, prices hovering at high levels Key cities: Tianjin, Wuhan, Chongqing, Chengdu, Changsha, , Xiamen, , Shenyang, Beijing, Shanghai, Shenzhen and Guangzhou, (Xian) 6 220

5 4-week rolling ASP index for 8 cities (RHS) 200

Weekly sales in 13 key cities ASP

Area 180

4 index

sold ( sold 160

3

,

140 May mn

2

- sqm

120 2008=100 )

1 100

0 80

08 11 12

09 13

10

08 11

08 11

09 09 12 12 13

09 10 12 13 14

10 11 14

- - -

- -

-

- -

- -

- - - - -

- - -

- - - - -

Jul

Oct

Apr Jan Jan Apr

Jun Feb Jun

Mar Dec Dec Mar

Sep Sep Sep

Nov Nov

Aug Aug

May May May

Sources: CREIS, Standard Chartered Research estimates Beijing retains ability to forestall ‘runs’ and has enough ammunition to boost short-term growth if needed

13 RMB Internationalization CNH Market and its Liquidity

14 CNH Market Overview

15 Strong Issuance of Dim Sum Bond in 2014

Total offshore assets has reached CNY 2.5tn Year-to-date issuance has exceeded 2013 total Total assets include deposits, CDs, bonds, and loans Annual gross issuance in Dim Sum bonds and CDs (CNY bn) Deposits CDs 3,000 450 Bonds CD Bonds Loans (CNY bn)

+30% 400 2,500 350

2,000 300 226

+74% 250 243 1,500 200 153 +24% 1,000 +205% 150 78

100 180 500 6 129 129 50 112 - 36 10 - 12 - 16 0 0 2010 2011 2012 2013 NOW 2007 2008 2009 2010 2011 2012 20132014YTD

Sources: CEIC, Bloomberg, Standard Chartered Research

16 One Currency, Two Markets

CNY - CNH Basis Risks Onshore CNY and Offshore CNH 0.30 6.50 Spot: (LHS) . Offshore CNH and onshore CNY move in a 0.25 similar fashion. However, a slight basis risk still 6.40 Offshore CNH 0.20 0.15 6.30 exists. 0.10 Onshore CNY 6.20 0.05 0.00 6.10 Spread (RHS) . Every once in a while, due to reasons such as -0.05 6.00 -0.10

speculative flow, money supply imbalance, or

Jun/12 Jun/13 Jun/14

Mar/12 Mar/13 Mar/14

Dec/11 Sep/12 Dec/12 Sep/13 Dec/13 Sep/14 corporate hedging preference, such basis would Sep/11 widen to a significant level. Data as of 18-Sep-14 Source: SCB, Bloomberg

Risk Mitigants . In February 2014, the CNY Premium over CNH . Key products offering include CNH was as large as 55 Pips, though the trend got Deliverable Forward, onshore CNY and quickly corrected. (the blue circle in the graph) CNY NDF.

17 Liquidity Overview

CNH CNY Onshore CNY NDF Product / Specifics (USD (USD (USD Tenor million’s) million’s) million’s) Daily Volume Spot 9,000 17,000 0 Swap / 15,000 16,000 4,000 Forward Maximum Tenor 10yrs 10yrs 10yrs Good Liquidity < 5yrs < 3yrs < 3yrs Market Standard Size Spot 20 20 Ticket 2-3yrs 10 5 10 – 20 3-5 yrs 10 5 5 – 10 6-10 yrs 5 Source: SCB

Size in CNH * Bid / Offer (in pips) Below 100 million 1 - 2 100 – 500 million 3 - 4 Above 500 million 4 - 5

* For Spot Transaction under normal market condition Source: SCB

18 Onshore-Offshore Interest Rates to Converge

CNH CGB curve much steeper than onshore Increased cross-border remittance channels have On-offshore CGB yield curve (%) vs tenor (years) tightened CNH liquidity; USD-CNH CCS rates up 50- 130bps since Feb 3.0 5.0 Onshore CGBs 2.8 5Y

4.5 2.6 3Y 2.4 4.0 Offshore 2.2 CGBs 3.5 2.0

3.0 1.8

1.6 2.5 USD-CNH 1.4 CCS 2Y (%) 2.0 1.2

1.5 1.0 0 1 2 3 4 5 6 7 8 9 10 15 20 30 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Sources: Standard Chartered Research 19 CNH Deposit Rates

Indicative Deposit Rates (p.a. as of September 2014)

Tenor Time Deposit Rate

Overnight 1.90 7 day 2.00 1 month 2.30 3 month 2.70 6 month 2.70

Source: SCB

Deposit Rates are Higher Now than 2 Years Back

3 2.5 2 Tighter liquidity situation has led to higher 1.5 1 CNH Deposit Rates 0.5 0 o/n 1 week 1 month 3 month 6 months

Source: SCB

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22 China, HK strategy

Ready to Connect?

Erwin Sanft, CFA Ryan Tsai, CFA Head of Equity Research Director China & Hong Kong HK equity strategist

September 2014

Ready to Connect?

. The Shanghai-Hong Kong Stock Connect programme should channel sufficient liquidity to drive rallies in selective groups of stocks, but not enough to push up the overall markets, in our view.

. For northbound, we prefer industry leading companies.

. For southbound, we believe small caps with high EPS growth and beta would perform better.

224 4 HK Connect a significant step towards market opening

HK Connect an “open” conduit A share total market cap Future expansion of quota highly likely, in our view QFII HK Connect will expand the foreign share of 2.3% A-share free float to 8% HK Connect Domestic . Existing QFII/RQFII quota equates to 2% of total market 1.2% institutions cap and 5% of A-share free float 7% . HK Connect northbound quota of RMB 300 bn will add another 3% to free-float market cap Retail . It also represents the first “open” conduit for 37% investors abroad to participate in the A-share market. . Once the mechanism is working smoothly, Controlling we would expect the quota amount to be shareholder s53% raised.

Note: Retail include mutual fund management companies, insurance 225 companies and brokers 5 Eligible stocks for the Stock Connect programme

. For northbound trading, overseas investors would have more stocks in the cyclical sectors. And there are also much more stocks with market caps of less than USD 3bn, but high trading turnover (over USD 22mn a day!) . For southbound trading, mainland investors have more choices in the property, tech and telecom sectors. But most of the eligible stocks have market caps of over USD 3bn

Sector weights for the eligible north/southbound shares Market cap distribution for the eligible north/southbound shares 0% (6) A share H share 100% 3% (143 ) 4% (86) Banks 31% 27% 90% 15% (262) 13% (96) Energy 16% 13% Industrials 15% 9% 80% 17% (102) Materials 7% 3% 70% Above USD 9.0 bn Cons. Discretionary 6% 8% 60% Insurance 6% 7% USD 3.0 - 9.0 bn 50% Utilities 4% 4% 83% USD 1.0 - 3.0bn Consumer Staples 3% 2% 40% (85 stocks) 64% Diversified Financials 3% 2% 30% (48 stocks) Below USD 1.0bn Health Care 3% 1% 20% Real Estate 3% 9% 10% Information Technology 2% 5% Telecom Services 1% 9% 0% A share H share Source: Bloomberg, Standard Chartered Research 226 6 Northbound: What is different about the A-share market?

. Small caps trade at a huge premium to large caps . SOEs make up 70% of the market . Fundamentals are usually ignored in favour of themes, “news flow” and technical analysis . Local institutional investors behave like retail investors due to daily performance rankings . “Zhuang Jia”, who are syndicates with large pools of money, drive small-cap share performance . Daily 10% limit on share price moves . Information flow is (1) asymmetrical, (2) intense . “Market cap management” by listed corporates

Source: Standard Chartered Research 227 7 The case in favour of investing in A-shares

1) Diversification – No meaningful correlation with global markets 2) Credit easing – Direct exposure to the upturn in China’s credit cycle 3) Unique and deeper sector exposure – A-shares are a larger equities universe than overseas-listed China equities, offering more varied and unique sector exposure

Source: Standard Chartered Research 228 8 A-shares have no meaningful correlation with global markets

. Ideal candidate for diversification and mitigation of global market risks . Even during Eurozone debt crisis, correlation did not rise to a significant level

Performance correlation between markets 1.0

0.8

0.6 EM vs. DM 0.4

0.2

0.0 A shares vs. DM

(0.2) Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Source: Bloomberg, Standard Chartered Research 229 9 Credit easing should benefit the A-share markets

. China’s policy has shifted to a more pro-growth stance since April, when it became clear that nationwide property prices are on a downward trend . We expect China’s credit cycle to recover in 4Q14. Declining interbank rates and a gradual recovery in bank lending growth indicate stabilisation in the credit cycle

Credit growth to rebound (potential 2H14 path) (% y/y) (%; inverted) 34 China's total credit growth 0 32 (Lhs) 30 1 28 26 2 24 3 22 20 4 18 16 5 14 7 day repo rate, moved 6M fwd (Inverted; Rhs) 12 6 2008 2009 2010 2011 2012 2013 2014 2015

Source: Bloomberg, Standard Chartered Research 330 0 Unique and deeper sector exposure

. Defense, Aerospace . Capital goods, Electrical equipment, Auto parts . Liquor . Home appliances . Infrastructure . SME banks . Pharmaceuticals . Media . Software . Agriculture . Technology hardware

Source: Standard Chartered Research 331 1 A share Leaders (I)

Mkt cap Daily T/O EPS YoY (%) PER (x) PBR (x) ROE (%) Gearing Stock Ticker Company (USD mn) (USD mn) 14E 15E 15E 14E 14E (%) Leadership Connect Capital Goods, Auto 600104 CH SAIC Motor 33,288 51.3 13 13 6.4 1.3 18 (15) Domestic Top 3 OEM auto producer Yes 600031 CH Sany Heavy Industry 7,264 15.6 (23) 11 17.9 1.7 9 76 Global #5 construction machinery maker Yes 000039 CH CIMC 6,898 14.9 8 31 13.8 1.8 10 75 Global #1 container box maker 600089 CH TBEA 5,430 52.3 17 31 13.3 1.8 11 63 Global Top 3 electrical transformer maker Yes 000581 CH Weifu High-Tech 4,416 26.8 48 36 12.1 2.5 15 (16) Global Top 3 fuel injection equipment maker

000559 CH Qianchao 4,335 89.1 7 17 33.4 6.4 16 57 Global Top 10 auto parts maker 601877 CH Chint Elec. 4,264 5.2 21 19 11.9 4.0 30 (2) Global Top 10 power equipment maker Yes 600066 CH Bus 3,817 28.7 21 17 9.1 2.2 22 (31) Global #1 bus maker Yes 600660 CH Fuyao Glass 3,366 15.8 17 13 8.1 2.1 24 33 Global #4 auto glass maker Yes 600761 CH Anhui Heli 1,130 10.3 5 7 10.3 1.7 16 (1) Global #5 forklift maker Yes Financial 601166 CH 32,208 141.2 17 16 3.5 0.8 22 (128) Domestic Top 3 private sector lender Yes 000001 CH 19,314 81.8 4 21 5.1 0.9 16 (69) Domestic Top 3 private sector lender 002142 CH Bank of 4,631 13.4 10 16 4.6 0.9 20 69 Domestic Top 5 private sector lender Consumer discretionary 000333 CH 14,838 60.7 (24) 21 7.5 2.2 26 1 Global Top 5 home appliances brand 000651 CH 14,318 80.4 25 18 5.5 2.0 30 (68) Global #1 aircon maker 002024 CH Suning 10,014 100.1 (320) 26 NA 2.2 (3) 26 Domestic #1 electronics retailer

600398 CH Heilan Home 7,815 8.9 142 32 15.3 5.2 42 (72) Domestic #1 menswear manufacturer Yes 600315 CH Jahwa United 3,967 30.6 23 24 19.8 6.0 25 (52) Domestic #1 cosmetics brand Yes 002032 CH Zhejiang Supor 1,628 2.7 18 19 12.1 2.5 19 (38) Global #2 cookware maker 002269 CH Metersbonwe 1,627 5.8 27 24 15.5 2.4 13 7 Domestic #1 casual fashion brand 000726 CH Luthai Textile 1,488 6.4 14 14 7.0 1.3 17 (1) Global #1 high-end fabric maker

Source: Wind, Bloomberg, Standard Chartered Research 332 2 A share Leaders (II)

Mkt cap Daily T/O EPS YoY (%) PER (x) PBR (x) ROE (%) Gearing Stock Ticker Company (USD mn) (USD mn) 14E 15E 15E 14E 14E (%) Leadership Connect Energy 600256 CH Guanghui Energy 7,491 68.4 166 52 15.1 3.8 16 109 Domestic #1 privately owned energy producer Yes 002353 CH Jereh Oilfield Serv. 6,558 27.5 (6) 40 19.3 5.8 25 3 Domestic Top 5 oil services provider 600583 CH Offshore Oil Engineering 5,982 22.1 30 17 8.8 1.9 19 6 Global Top 5 offshore E&C company Yes

Consumer staples 600519 CH Kweichow Moutai 30,243 81.5 (5) 11 10.6 3.5 31 (51) Domestic #1 liquor brand Yes 000858 CH 11,764 55.6 (14) 11 9.5 1.7 17 (70) Domestic Top 3 liquor brand 000568 CH 4,133 32.9 (32) 11 9.8 2.2 21 (48) Domestic Top 5 liquor brand Healthcare, pharmaceuticals 600276 CH Hengrui Medicine 8,314 19.9 8 23 28.1 6.5 20 (32) Domestic #1 cancer & surgical drug maker Yes 300015 CH Ai’er Eye Hospital 2,821 12.3 (11) 31 44.2 8.7 16 (39) Domestic Top 3 medical equipment maker 002223 CH Yuyue Med. Equip. 2,518 18.8 25 31 36.7 8.7 18 (20) Domestic #1 eye care provider Transportation 601006 CH Daqin Railway 18,856 25.8 17 13 6.9 1.3 18 6 Domestic largest listed railway Yes 600009 CH Shanghai Int'l Airport 4,564 13.1 14 13 11.6 1.5 12 (24) Domestic Top 3 airport operator Yes TMT 002415 CH Digital Tec 13,065 39.0 41 37 13.5 5.0 29 (39) Global #1 surveillance equipment maker 300104 CH Leshi Internet IT 5,365 67.4 43 50 57.2 12.4 17 53 Domestic #1 independent online video site 300027 CH Huayi Brothers 4,796 82.8 25 18 29.3 6.4 19 1 Domestic #1 independent film producer 600489 CH Fibrehome Telecom 4,074 12.0 57 13 32.7 2.2 6 41 Domestic #3 telecom equipment maker Yes 600804 CH Dr Peng Telecom 3,627 54.1 59 45 23.9 4.6 14 (1) Leading private broadband service provider Yes

600570 CH Hundsun Tech. 3,553 51.9 18 28 44.5 11.2 19 (27) Domestic #1 financial software provider Yes Materials 600019 CH Baoshan Steel 12,030 12.0 22 14 9.1 0.6 6 40 Global Top 5 steel producer Yes

Source: Wind, Bloomberg, Standard Chartered Research 333 3 Southbound: A secular trend of China’s wealth globalisation

. A clear preference for liquid instruments in overseas portfolios among China’s wealthy households . 51% of ultra high net worth individuals and 33% of high net worth individuals have overseas investments

The deeper the wallet, the greater the interest in asset globalisation % of surveyed wealthy individuals who have overseas investments

(%) High net worth individuals Ultra high net worth individuals 60

50

40

30

20

10

- 2011 2013

Source: , Bain Consulting Group, Standard 334 Chartered Research 4 Small caps in HK are much cheaper than in A shares

. Mainland investors have a strong preference for small caps, reflecting the extreme high turnover velocity and high valuation premiums for A-share small caps . On 200% velocity, the Stock Connect scheme will bring liquidity equal to 1.1x HK small caps’ current daily turnover

Lowest small cap valuations in HK Extremely high turnover velocity for A-share small caps Large and small caps P/E gaps in A shares, HK and the US 2015 P/E (x) A share - Small … 2.9 25 47% A share - overall 1.7 premium Japan - Tokyo 1.3 20 Small cap at 137% 21% Korea 1.1 premium to 15 discount NYSE (US) 0.8 large caps Taiwan SE Corp. 0.8 10 Deutsche Borse 0.7 Australian SE 0.6 5 A share - Large … 0.5

0

NYSE (Europe) 0.5

HKEX 0.4

2000

) )

Russell

S&P 100 S&P

Small cap Small cap Small

Large cap Large Large cap Large (USD<3bn)

0.0 1.0 2.0 3.0 (USD<3bn)

(USD>10bn (USD>10bn Source: Bloomberg, Wind, Standard Chartered Research 335 5 Access to well-known large caps not listed in A-share markets

. Selective large cap stocks with good share price momentum and high earnings growth prospects would also attract mainland investors’ attention . CITIC, HKEx, , Lenovo and China Unicom could show up in their radar screen

Daily Daily Total EPS Last Total EPS Last Price Industry group mkt cap T/O growth 3M Price Industry group mkt cap T/O growth 3M

Ticker Company (HKD) (USD mn) USD mn 2015 Perf. Ticker Company (HKD) (USD mn) USD mn 2015 Perf. 5 HK HSBC 82.40 Banks 203.7 147.6 9.0 2.0 151 HK Want Want China 9.50 Food Beverage 16.2 22.1 14.8 (9.4)

1299 HK AIA 42.70 Insurance 66.3 102.3 15.6 9.9 322 HK Tingyi 21.40 Food Beverage 15.5 10.5 22.0 0.2

2328 HK PICC 13.94 Insurance 24.5 25.1 13.3 19.3 2319 HK China Mengniu Dairy 36.25 Food Beverage 9.2 22.8 25.5 1.1

13 HK Hutchison Whampoa 100.60 Capital Goods 55.3 82.4 7.7 (3.6) 1044 HK Hengan 80.80 Consumer products 12.8 14.4 20.7 2.4

267 HK CITIC 13.78 Capital Goods 44.3 70.1 28.0 3.9 1 HK Cheung Kong 139.10 Real Estate 41.6 67.7 (4.1) 3.7

392 HK Beijing Enterprises 69.15 Capital Goods 11.5 14.5 19.9 (4.9) 16 HK SHK Prop 117.30 Real Estate 41.2 64.3 8.2 9.9

1928 HK Sands China 45.85 Macau gaming 47.7 108.0 18.7 (13.7) 688 HK COLI 21.75 Real Estate 22.9 68.6 14.1 8.2

27 HK Galaxy Entertainment 51.85 Macau gaming 28.4 86.5 22.5 (8.6) 12 HK Henderson Land Dev 55.60 Real Estate 21.5 24.8 1.7 18.7

1128 HK Wynn Macau 26.20 Macau gaming 17.6 23.2 7.1 (6.6) 1929 HK Chow Tai Fook Jewellery 11.06 Retailing 14.3 5.3 14.3 0.4

880 HK SJM Holdings 17.76 Macau gaming 13.0 18.2 8.4 (7.0) 700 HK Tencent 124.50 Software & Services 150.4 295.3 31.6 7.7

2282 HK MGM China 23.65 Macau gaming 11.6 19.6 9.0 (1.5) 992 HK Lenovo 12.08 Tech Hardware 16.2 49.4 24.1 20.3

388 HK HKEx 178.30 Diversified Financials 26.8 170.5 26.9 22.6 941 HK China Mobile 98.20 Telecom 258.1 273.4 (1.4) 30.1

883 HK CNOOC 14.08 Energy 81.0 123.5 6.1 0.7 762 HK China Unicom 13.70 Telecom 42.3 56.3 17.9 14.2

135 HK Kunlun Energy 12.46 Energy 13.0 30.1 13.5 (4.0) 728 HK China Telecom 4.91 Telecom 51.3 37.5 9.0 26.9

Date as of 15th Sep, 2014 336 Source: Bloomberg, Standard Chartered Research 6 Mainland investors’ trading behaviour – quantitative back-testing

. Size factor is the most important, small or micro caps work best in A-share markets . Stocks with high EPS growth perform best in A-share markets . Valuations do not matter, as stocks with high valuations tend to perform better . Quality factors do not matter much . Rampant stock and sector rotation . Moderately high beta works best

Back-testing on market cap vs. returns… …and on EPS growth vs. returns in A-share markets Annual returns during 2010-14 by market cap size Annual returns by EPS growth levels during 2010-14 Median25 ann. Median ann. return (%) return (%) 20 15 The higher the EPS growth, the better 15 The smaller the stock, the better the 10 10 performance 5 5

0 0 (5) (5) (10) (10) Bottom 2 3 4 5 6 7 8 9 Highest (Performance by market caps) 10% (Performance by levels of EPS growth) 10% Source: Standard Chartered Research 337 7 Attractive southbound stocks for mainland investors

Mkt cap EPS growth (%) Our Ticker Company USD mn Sector FY1 FY2 Avg. Beta rating 1205 HK CITIC Resources 1,289 Industrials 6900.0 114.3 3507.1 0.90 NA 506 HK China Foods 1,180 Consumer Staples 91.8 453.8 272.8 1.08 NA 1117 HK China Modern Dairy 2,560 Consumer Staples 214.9 20.9 117.9 0.59 OUTPERFORM 297 HK Sinofert Holdings 1,124 Materials 167.6 58.7 113.2 1.04 NA 606 HK China Agri-Industries 2,188 Consumer Staples (77.6) 286.2 104.3 1.11 NA 1068 HK China Yurun Food 870 Consumer Staples 34.8 171.6 103.2 1.33 OUTPERFORM 242 HK Shun Tak Holdings 1,609 Industrials 239.1 (38.3) 100.4 0.77 NA 3808 HK Hong Kong 1,493 Industrials 90.4 16.7 53.5 0.90 NA 1101 HK Rongsheng Heavy Industries 1,532 Industrials 62.2 44.6 53.4 1.19 NA 934 HK Sinopec Kantons 2,046 Energy 45.5 36.5 41.0 0.59 NA 1293 HK Baoxin Auto 1,910 Cons. Discretionary 30.3 31.1 30.7 0.74 OUTPERFORM 1918 HK Sunac China 2,740 Financials 34.5 26.3 30.4 1.15 OUTPERFORM 3360 HK Far East Horizon 2,922 Financials 20.7 30.0 25.3 1.07 NA 1111 HK Chong Hing Bank 1,021 Financials 32.8 17.6 25.2 0.62 IN-LINE 1333 HK China Zhongwang 2,355 Materials 12.8 34.1 23.5 1.01 NA 881 HK Zhongsheng Group 2,324 Cons. Discretionary 18.1 28.1 23.1 1.14 OUTPERFORM 1728 HK China ZhengTong Auto 1,326 Cons. Discretionary 20.3 22.4 21.3 1.13 OUTPERFORM 3998 HK Bosideng 1,281 Cons. Discretionary 32.2 9.6 20.9 0.60 IN-LINE 1638 HK Kaisa Group 2,013 Financials 12.9 24.5 18.7 0.94 OUTPERFORM 751 HK Skyworth Digital 1,523 Cons. Discretionary 28.3 5.9 17.1 0.96 NA 425 HK Minth 2,223 Cons. Discretionary 17.1 16.3 16.7 0.90 OUTPERFORM 315 HK SmarTone Telecom 1,441 Telecom 25.1 7.7 16.4 0.55 UNDERPERFORM 148 HK Kingboard Chemical 2,141 Tech 15.4 13.7 14.5 1.06 NA 1083 HK Towngas China 2,955 Utilities 10.1 18.2 14.1 0.60 IN-LINE 1828 HK Dah Chong Hong 1,156 Cons. Discretionary 10.0 16.5 13.2 0.89 OUTPERFORM 3899 HK CIMC Enric Holding 2,127 Industrials 8.1 17.0 12.6 0.87 OUTPERFORM 2168 HK Yingde Gases Group 1,902 Materials 7.0 16.8 11.9 0.95 NA 861 HK Digital China 1,078 Tech NA 11.7 11.7 1.00 NA 272 HK Shui On Land 2,034 Financials 6.0 17.1 11.6 1.16 IN-LINE 1813 HK KWG Property 2,349 Financials 4.5 18.3 11.4 1.28 OUTPERFORM 2128 HK China Lesso Group 1,738 Industrials 3.8 18.9 11.3 1.25 NA 1833 HK Intime Retail 1,948 Cons. Discretionary 12.3 9.6 11.0 0.72 IN-LINE 737 HK Hopewell Highway Infrastructure 1,539 Industrials 11.2 10.6 10.9 0.66 NA 123 HK Yuexiu Property 1,973 Financials 7.3 14.1 10.7 1.02 IN-LINE 1888 HK Kingboard Laminates 1,331 Tech 9.7 11.2 10.4 0.92 IN-LINE Source: Bloomberg, Standard Chartered Research 338 8 A-H premium have narrowed for large caps

. A convergence of large/mid valuations in aggregate has largely happened, while larger discrepancies only exist in the small cap space . The price gaps for small caps should continue to fluctuate at a wide range, depending on the stocks’ growth themes and company-specific catalysts

Weighted A vs. H shares premium (discount) 200

175

150

125 Small cap 100

75

50

25 Mid cap

0 Large cap (25) Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg, Standard Chartered Research 339 9 Global Disclaimer (page 1 of 2)

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440 0 Global Disclaimer (page 2 of 2)

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441 1 Making the Most of the Opportunity Our Integrated Solution for SH-HK Stock Connect

Barnaby Nelson Regional Head, Investors & Intermediaries , Transaction Banking Shanghai-Hong Kong Stock Connect is a mutual market access programme, through which investors in Hong Kong and Mainland China can trade and settle shares listed on the other market respectively via the exchange and clearing house in their local market

43 What is it?

Northbound Route Hong Kong Shanghai Exchange Exchange Global Investors

. All individual investors Quota: RMB 300bn . SSE 180 index stocks HKEx members . SSE 380 index stocks Daily: RMB 13bn . All institutional investors . A/H dual listing stocks

Southbound Route

Shanghai China Investors Hong Kong Exchange Exchange

.Individual with > RMB500k in Quota: RMB 250bn securities trading accounts SSE members . Hang Seng large-cap stocks .All institutional investors Daily: RMB 10.5bn . Hang Seng mid-cap stocks . A/H dual listing stocks

44 What is in Scope?

Northbound: Southbound: SSE Securities SEHK Securities

SSE180 HS LargeCap Index Constituent Stocks SSE380 HS MidCap

A+H SSE-SEHK A+H SSE-SEHK A+H

A+H on other Mainland exchange Shares under risk alert board Shares that are not traded in HKD Excluding Shares that are not traded in RMB H Share with corresponding SSE A Share under risk alert board Total No. of Stocks* 568 266

Market Capitalisation (MC)* 90% 82%

Average Daily Turnover (ADT)* 80% 78%

SSE Securities = securities listed and traded on Shanghai Stock Exchange (SSE) which may be traded by Hong Kong and

overseas investors under Shanghai-Hong Kong Stock Connect •No. of stocks as of 10 April 2014; MC as at end of March 2014; ADT is for January-March 2014 # For any SSE security not accepted as an SSE Security upon launch due to its being under risk alert board, if it is subsequently removed from the risk alert board, it will be accepted as an SSE Security if it falls under any of the selection criteria

45 Key Challenges Focus on Quota Management

Northbound Southbound Trading of SSE Securities Trading of SEHK Securities Aggregate Quota RMB 300 billion RMB 250 billion Daily Quota RMB 13 billion RMB 10.5 billion

Quota control only applies to buy orders. Sell orders can continue after quota has been reached

Quota is used on a first-come, first-served basis

Aggregate quota is calculated at the end of each trading day

Daily quota is calculated real-time during trading hours

Daily quota will be disseminated on via Orion (CC OG) and OMD Index Feed at 5-second interval as well as on HKEx website at 1-minute interval

Aggregate Quota Balance: Aggregate Quota – Aggregate Buy Trades + Aggregate Sell Trades

Daily Quota Balance: Daily Quota – Buy Orders + Sell Trades + Adjustments (e.g. Buy Order cancelled, Buy Order rejected by SSE, Buy Order executed at a better price)

CC OG= China Connect Open Gateway OMD = Orion Market Data

46 What is the Shanghai-Hong Kong Stock Connect? Key Challenges

Challenges Outlook (unconfirmed, based on market sentiment)

Requirement to move shares to executing brokers on This has driven flows to concentrate amongst broker/custodian ! T-Day for a sell order for some investors (and banks who can offer an ‘integrated model’ associated exposure to Brokers holding investors’ This has also driven the need for brokers to appoint their securities) custodian banks as GCPs on HKEx

! Issues on tax treatment: how will Through Train Confirmation likely before go live investments be taxed in China? Will a fixed term tax waiver be approved?

Legal issues on share ownership (who will be the A show-stopper for UCITS/AIFMD funds. Discussions still ! beneficial owner: HKEx, the Broker or the Investor)? ongoing with CSRC (clarification expected prior to Day 1) Requirement to pre-fund cash accounts for those that Major banks are providing credit facilities wherever possible ! are not able to secure intraday credit facilities

Quota availability: what happens when quota is Expected to be a short term consideration ? reached? Is there scope for front-running? Provisions already in place for quota reviews

? How will depositary fees be structured? Discussions ongoing with HKEx / HKSCC

Margin financing and stock lending: will it be “Very positive” discussions ongoing between HKEx and ? allowed? authorities ? When will Day 1 be? Market expectation is 2nd half of October

47 48 How does Standard Chartered Provide Access to A-Shares

Best in Clearing Trade FX class A- Research and execution liquidity shares settlement platform

Flexible model Market leading, Flexible for pre-delivery in depth funding Market leading

coverage of support depth of CNH Relationships China mid-cap liquidity with key Global stocks Synthetic DVP* Custodians

* Provided depending on credit approval

49 A Leading Research and Trading Broker for your China trading

Our unique research proposition 1 Equity Cash 2 derivatives equities

Equity Full spectrum Corporate of equity 6 linked access solutions solutions 3

Equity capital Equity markets research

With a complete equities platform Standard Chartered is able to offer unrivalled long-term service to our clients

50 A Leading Research and Trading Broker for your China trading

■ We have three primary written research brands across equities, FICC, and macro

■ Integration delivers interesting confirmations/contradictions, similarities/anomalies = greater richness and differentiation

■ The SCene = easy-to-read daily

■ iPad App, Bloomberg, and Research on the Web access

51 SCB FX Strength in CNH-HKD

1 Well Established Deposit Base 2 Note Issuing Bank

. Good execution capabilities in different banking . Standard Chartered Bank’ Hong Kong is one of top 3 segments and with high reputational regards in Hong HKD and CNH deposit holding banks Kong . Liquidity and funding width and depth are also among Under more stringent regulation to ensure risk the top 3 across all segments in Hong Kong . management is top of the class

6 Pioneer in RMB 1 2 Internationalization 3 Top CNH-HKD Pricing

. Standard Chartered Bank is at the fore front of RMB Capabilities Internationalization and pioneers in CNH product Key Factors in offerings . With width and depth in CNH and HKD pricing, taking up 6 Selecting SCB as your the market making role in the competitive landscape . Won Best RMB Bank in Hong Kong Asset Triple A RMB Partnering 3 Award 2014 Banks in Hong Kong . Able to quote 5 -10 pips wide up to 100 mio USD notional in CNH / HKD cross, and able to handle volume . Strategic alignment in SCB’s focus on Greater China up to 20 bio CNH a day region and the pioneers in RMB internationalization process

5 4 Large Market Share 5 Experienced in RMB 4 . Standard Chartered Bank handles roughly 12 % of the Trading Support Facilities currency pairs' total volume in spot and forward market, which translates into 3 bio USD on a daily basis . Standard Chartered set up the Trading Support Facilities (TSF) . Rank 1st in EBS Direct as liquidity provider in May 2014, for RMB shares settlement with HKEX ranks 2nd on total USDCNH volume on EBS Direct in . Experience in arranging exchange related FX facilities warrants May 2014 and rank 6th on spot volume globally on 360T. operational viability (Pls note most CNH liquidity is with EBS Direct)

Source: EBS, ICAP, 360T, Asset Trple A Award A market leader in CNH: ensuring continued liquidity for you through all market conditions 52 Liquidity More on SCB FX Strength in CNH-HKD

Top 13 Players in EBS Direct ( 26 – 30 May 2014 )

USDHKD – 1st USDCNH – 1st

Competitor 10 7.1% Competitor 9 7.3% Competitor 8 3.0% Competitor 8 5.5% Standard Competitor 7 5.1% Competitor 7 1.8% Standard Chartered Chartered Bank Bank 32.7% Competitor 6 3.0% 38.4%

Competitor 4 10.0% Competitor 9 0.0% Competitor 5 0.0% Competitor 11 0.0% Competitor 6 0.0% Competitor 12 0.0% Competitor 10 0.0% Competitor 11 0.0% Competitor 5 15.2% Competitor 3 4.5% Competitor 12 0.0%

Competitor 4 3.0% Competitor 2 13.6%

Competitor 1 7.1%

Competitor 3 14.1% Competitor 1 24.5% Competitor 2 4.0% Source: EBS, ICAP A market leader in CNH: ensuring continued liquidity

for you through all market conditions 53 Our Operating Model: Details

• Sell Orders: . Daily sweep (for certain clients): Shares to be pre-delivered from custodian into broker account at 7.15am . Stocks available for 8.15am market snapshot

• Buy orders . Stocks delivered to custodian account at end of day

• Broker holding assets under custody . This model may conflict with US (17f5, Erisa) and European (UCITS) fund regulation . As a result, we are conscious that this model is not viable for some global clients as a Day 1 platform . This model does not impact Asian investors, unregulated funds (ie Cayman, BVI) or private bank assets . Standard Chartered can also provide a P-Note structure from Day 1 as a simplified tool for gaining A share exposure

54 Our Strategic Operating Model: Details

• Standard Chartered Securities to appoint SCB Bank as Global Clearer

• Standard Chartered Bank to hold all assets throughout the clearing process

• This model is entirely in line with existing regulation for all client types

• All buy- and sell- orders will be settled throughout the trading day (using standard settlement batches). No special instructions will be required . Model expected to be in place by end 2014 (see statement)

55 How does Standard Chartered Provide Access to A-Shares

Best in Clearing Trade FX class A- Research and execution liquidity shares settlement platform

Flexible model Market leading, Flexible for pre-delivery in depth funding Market leading

coverage of support depth of CNH Relationships China mid-cap liquidity with key Global stocks Synthetic DVP* Custodians

* Provided depending on credit approval

56